ADP's Q1 2026 Earnings Call: Contradictions Emerge on Demand, Pricing, and Global Expansion

Date of Call: October 29, 2025

Financials Results

• Revenue: 7% revenue growth (Q1 FY2026 vs prior year)
• EPS: 7% adjusted EPS growth (Q1 FY2026 vs prior year)
• Operating Margin: Adjusted EBIT margin expected to expand 50 to 70 basis points (full year guide); ES margin decreased 50 bps in Q1; PEO margin decreased 140 bps in Q1

Guidance:

• Consolidated revenue growth for fiscal 2026 expected to be 5% to 6%.
• Employer Services revenue growth expected ~5% to 6%; pays-per-control ~flat for full year; retention expected to decline 10–30 bps.
• PEO revenue growth expected 5% to 7%; average worksite employee growth 2% to 3%.
• Average client funds balances expected to grow 3% to 4%; average yield ~3.4%; client funds interest revenue $1.30B–$1.32B; extended investment impact $1.26B–$1.28B.
• Adjusted EBIT margin expansion of 50–70 bps; effective tax rate ~23%; adjusted EPS growth 8%–10% supported by share repurchases.

Business Commentary:

* Financial Performance and Strategy: - ADP reported 7% revenue growth and 7% adjusted EPS growth for Q1 fiscal 2026. - The growth was driven by strong Employer Services new business bookings, particularly in their small business portfolio and Employer Services HR Outsourcing, despite a cautious approach to adding headcount due to macroeconomic conditions.

• Employer Services and PEO Performance:
• Employer Services segment revenue increased 7% on a reported basis and 5% on an organic constant currency basis.

• The PEO saw revenue growth of 7%, supported by growth in 0 margin pass-throughs and higher wages. However, PEO pays per control growth moderated slightly in the quarter.

• Client Retention and Satisfaction:

• Employer Services retention rate declined slightly but still exceeded expectations, while client funds interest revenue increased due to stronger average client funds balance growth.

• The company's overall client satisfaction score reached a new all-time high, reflecting improvements in each business unit, driven by investments in HCM technology and better implementation processes.

• AI Initiatives and Strategic Investments:

• ADP continues to advance its AI initiatives, with the use of generative AI in ADP Assist improving HR team efficiency and client satisfaction.
• Strategic acquisitions such as Pequity and WorkForce Software are aligned with ADP's vision to lead with best-in-class HCM technology, enhancing HR outsourcing and payroll solutions.

Sentiment Analysis:

Overall Tone: Positive

• Management: "We reported solid first quarter results that included 7% revenue growth and 7% adjusted EPS growth." CFO: "We are maintaining our fiscal 2026 consolidated revenue outlook for 5% to 6% growth" and reinforced confidence in guidance; CEO highlighted record sales volume, product momentum (Lyric, Next‑Gen) and AI/technology investments driving productivity and client satisfaction.

Q&A:

• Question from Samad Samana (Jefferies LLC): Can you update on the deal-cycle backdrop, time to close and any change in timelines for larger customers?
  Response: Demand is relatively stable, pipeline aging has returned to pre‑pandemic/normal levels, and no meaningful change in deal cycles or time-to-close observed in Q1.

• Question from Samad Samana (Jefferies LLC): Given modest downticks in pays per control and retention, how are you confident in the Employer Services guidance and what should we expect in the next quarter?
  Response: Guidance remains intact because weaker pays-per-control is offset by higher client funds interest, FX and other small items; Q2 has modest timing effects (one extra processing day and last year's SUI timing) but no material change to full‑year outlook.

• Question from Mark Marcon (Robert W. Baird): Which areas of bookings were most notable and what is the status/economic impact of embedded payroll in the lower end of the market?
  Response: Bookings accelerated across small business (retirement, insurance) and Lyric; embedded payroll is early, has not materially contributed yet, and is a strategic growth initiative with most contribution still ahead.

• Question from Mark Marcon (Robert W. Baird): How is Next‑Gen being used by clients and what are the retention and profitability implications?
  Response: Next‑Gen yields faster implementations, higher client and implementation satisfaction, materially lower client contacts, and should drive sustained retention improvement and productivity/profitability uplift as rollout expands.

• Question from Jinli Chan (Wells Fargo Securities) for Jason: What drove the weakness in U.S. pays‑per‑control (PPC) and why do you expect it to be flat for FY26?
  Response: The change is small (tens of basis points); internal hiring data show tight but static hiring with low layoffs, so PPC guidance was moved to the low end (rounded to 0%) and expected to remain unless macro shifts materially.

• Question from Jinli Chan (Wells Fargo Securities): How should we model expense cadence and the margin dynamic for the rest of the year?
  Response: Q1 was slightly better than expected despite WorkForce Software integration drag; expect similar Q2 (adjusted for acquisition anniversary) and a ramp in the back half driven by efficiencies and GenAI productivity, supporting the 50–70 bps full‑year expansion.

• Question from Kartik Mehta (Northcoast Research): Are your pricing expectations for FY26 unchanged from prior guidance given the economic backdrop?
  Response: No change — price expectations remain as previously guided (a bit lower than post‑COVID highs but above pre‑COVID), and first‑quarter results don't warrant revising that assumption.

• Question from Kartik Mehta (Northcoast Research): Where are you in rolling out AI tools to the salesforce (percentage deployed) and plans for full rollout?
  Response: Deployment is north of the ~40% cited at Investor Day, adoption is accelerating, and next iterations of generative AI tools (call summarization, pre‑call planning, coaching) are expected to materially boost seller productivity.

• Question from Jared Levine (TD Cowen) for Bryan: Did PEO WSEs come in line with expectations for Q1 and what underpins confidence to reach the guide midpoint?
  Response: WSEs were broadly in line (slightly above) expectations; confidence in modest second‑half ramp is bookings‑driven and management is investing in the team to deliver that growth.

• Question from Jared Levine (TD Cowen): How did the PEO July 1 benefits enrollment perform — any change in participation or buydown behavior?
  Response: Enrollment executed well with participation at the highest levels in ~4 years in target higher‑wage industries, supporting the PEO value proposition.

• Question from David Paige Papadogonas (RBC Capital Markets): Can you provide color on the Pequity acquisition — rationale and financial profile?
  Response: Pequity is a strategic, product‑led acquisition to add compensation management capabilities; financially it's small and not material to FY26 results, and the cost was contemplated in the reaffirmed outlook.

• Question from Daniel Jester (BMO Capital Markets): Any differences you're seeing between U.S. and international markets in demand?
  Response: International tends to be lumpy due to large complex deals; Q1 was softer after a strong finish in Q4, but pipeline is solid and teams are executing to reaccelerate growth later in the year.

• Question from Daniel Jester (BMO Capital Markets): For the ~20% of mid‑market new bookings not choosing Next‑Gen, why and will adoption reach 100%?
  Response: Many opt outs are 'knockouts' (e.g., adding locations or entities) where a single‑off configuration is needed; management does not expect 100% adoption given these structural cases.

• Question from Tien‑Tsin Huang (JPMorgan): How do you rate PEO WSE performance vs. peers and competitive positioning?
  Response: Management sees strong momentum and believes ADP is winning with a focused leadership team and structural advantages; Q1 WSEs were slightly ahead of expectations and ADP expects continued booking success within the 2%–3% WSE range.

• Question from Tien‑Tsin Huang (JPMorgan): Given changes at Fiserv, does that alter expectations from the embedded payroll partnership?
  Response: ADP remains fully committed to the Fiserv partnership; rollout is early but technical, sales and marketing collaboration is strong and the bulk of embedded opportunity remains ahead.

• Question from Kevin McVeigh (UBS): What is the sensitivity/impact of the one processing day from Q1 to Q2?
  Response: It's modest — roughly on the order of ~$10 million and ~10 basis points to the revenue growth rate, not a meaningful change to guidance.

• Question from Kevin McVeigh (UBS): Both client funds interest and extended strategy increased about $10M — is that driven by rate or timing?
  Response: Primarily balance growth (denominator) drove the $10M uplift; yields were largely stable (~3.4%) with only marginal forward‑curve adjustments.

• Question from Dan Dolev (Mizuho): Can you expand on the pays‑per‑control moderation and what it means for guidance?
  Response: The move narrows the range toward the low end (tens of basis points); hiring remains tight and static with very low layoff levels, so the adjusted expectation is modest and already incorporated into guidance.

• Question from Dan Dolev (Mizuho): Do recent large‑employer announcements (e.g., Amazon) change your calculus?
  Response: No material change — ADP's large, diversified base (1.1M clients, 26M U.S. workers paid) means such items are contemplated in guidance and are not expected to materially alter the outlook.

• Question from Michael Infante (Morgan Stanley): How are you thinking about supporting stablecoin payroll rails and regulatory/tax constraints?
  Response: ADP is monitoring regulatory developments closely and preparing technically to support alternative payroll rails, but adoption depends on regulatory clarity; ADP will enable support when regulators and banking environment permit.

• Question from Zachary Gunn (FT Partners): Does the reaffirmed guide still bake in a moderation in the macro or has the macro moved toward your expectations?
  Response: The base case remains similar to three months ago with modest refinements at the margins (PPC rounded down, client funds interest slightly up); management reconfirmed confidence in the reaffirmed guide while acknowledging risks outside their control.

Contradiction Point 1

Demand and Deals

It involves differences in the perception of demand and deals, which are critical for understanding ADP's sales pipeline and growth potential.

Can you update on deal cycles and closing timelines, particularly with larger clients? - Samad Samana (Jefferies LLC)

2026Q1: The HCM demand backdrop is relatively stable, similar to pre-pandemic levels. No significant changes are observed in deal cycles. - Maria Black(CEO)

Can you explain the underperformance in Employer Services new business bookings versus expectations? - Bryan C. Bergin (TD Cowen)

2025Q4: Softness in Employer Services was in the HRO business and international markets. However, pipeline remains healthy and active. - Maria Black(CEO)

Contradiction Point 2

Pricing

It involves ADP's expectations for pricing contributions, which are crucial for financial forecasting and understanding the company's revenue growth strategy.

Has the economic environment altered your pricing expectations? - Kartik Mehta (Northcoast Research Partners, LLC)

2026Q1: We do not see any change in pricing assumptions with the current macroeconomic environment. - Peter Hadley(CFO)

What are the expectations for pricing contributions in fiscal '26 compared to historical norms? - Ramsey Clark El-Assal (Barclays Bank PLC)

2025Q4: Pricing assumptions for '26 are consistent with recent trends, around 100 basis points, due to continued macroeconomic uncertainties and higher inflation expectations versus pre-pandemic norms. - Peter Hadley(CFO)

Contradiction Point 3

Next Gen Product Rollout

It involves the rollout and adoption of ADP's Next Gen products, which are critical for understanding the company's product strategy and market competitiveness.

Can you discuss Next-Gen deployment in the mid-market and its impact on client satisfaction and retention? - Mark Marcon (Robert W. Baird & Co. Incorporated)

2026Q1: 80% of new mid-market clients are sold on Next Gen, leading to faster time to implementation, better satisfaction, and improved retention. - Maria Black(CEO)

Can you discuss the integration and impact of WorkForce Software and how Next Gen Product Now compares to the previous Workforce Now? - Mark Steven Marcon (Robert W. Baird & Co. Incorporated)

2025Q4: Next Gen Workforce Now is maturing, expanding to broader mid-market with positive client feedback. - Maria Black(CEO)

Contradiction Point 4

International Demand and Deal Cycles

It highlights differing perspectives on international demand and deal cycles, which are crucial for understanding ADP's global growth strategy and market conditions.

How does demand compare between the U.S. and international markets? - Daniel Jester(BMO Capital Markets Equity Research)

2026Q1: International demand is lumpy but solid, with plans to reaccelerate growth later in the year. - Maria Black(CEO)

Can you elaborate on the international bookings that were soft? Also, discuss the growth potential for the embedded offering with Fiserv? - Ramsey El-Assal(Barclays)

2025Q3: International bookings were soft due to macroeconomic uncertainty, particularly in key markets. - Maria Black(CEO)

Contradiction Point 5

Macroeconomic Uncertainty and Impact on Hiring

It underscores differing views on how macroeconomic uncertainty affects hiring patterns, which directly impacts ADP's core business model.

Can you provide an update on deal cycles, time to close with larger customers, and your confidence in maintaining Employer Services guidance? - Samad Samana(Jefferies LLC, Research Division)

2026Q1: Our base of big companies, of our clients, of workers, we're not seeing any meaningful change around that. - Peter Hadley(CFO)

Could you clarify how macroeconomic uncertainty affects hiring and sales cycles? - Dan Dolev(Mizuho Securities USA)

2025Q3: We are seeing stability in our base, with low unemployment and ongoing hiring, though at reduced rates. - Don McGuire(CFO)